Edited version of private ruling

Authorisation Number: 1011911520165

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Ruling

Subject: GST and supplies to a non-resident

Question 1

Is GST payable on the supply of maintenance and warranty services under your agreement with the overseas entity where the services are provided to their clients in Australia?

Answer

Yes, GST is payable on the supply of maintenance and warranty services under your agreement with the overseas entity where the services are provided to their clients in Australia.

Question 2

Can you claim the input tax credits on the importation of the spare parts?

Answer

Yes, you are entitled to claim the input tax credits on the importation of the spare parts.

Facts

You are newly established company and is registered for GST.

You signed a support and maintenance contract (the Contract) with the overseas entity to provide onsite maintenance and warranty services for their clients' information technology infrastructure in Australia.

In relation to accepting maintenance requests, the Contract provides that:

· You provide maintenance support services for the equipment itemised in the schedule to the Contract.

· The overseas entity processes all maintenance requests from its clients. The overseas entity then redirects the maintenance request to you. You then assign the maintenance request to your engineers.

· Any maintenance request redirected to you shall contain at least the following data, among others:

o description of the equipment

o location of the equipment

o the overseas entity's client contact information

o scope of maintenance services to provide

The Contract contains the following in relation to the supply of necessary parts:

a The overseas entity shall provide you with all necessary parts, which you may need to provide maintenance support services for their clients.

b The overseas entity shall at its own expense deliver necessary parts to your storages in accordance with equipment location territories mentioned.

c You are responsible for storing all parts on its own clean, safe and secure storages.

Among your responsibilities, as listed in the Contract, is to purchase on behalf of the overseas entity any parts needed to complete the service call.

Among the overseas entity's responsibilities, as listed in the Contract, is to reimburse you for all additional costs incurred with regard to movement of equipment, customs charges and all other reasonable costs incurred as part of a service call.

You also signed a memorandum of understanding (MOU) with the overseas entity for the purpose of procuring spare parts for computer hardware in Australia. The MOU states that the purpose of buying locally is to speed up delivery of order from time of invitation to quote to fulfilment of order.

As outlined in the Contract, the overseas entity recently sent to you necessary parts for you to use when providing maintenance services. You provided copies of the commercial invoice and the import declaration. The import declaration shows that GST was payable on the importation.

You stated that although the commercial invoice and the import declaration show the name of your related entity, the goods were meant for you. This was done because your related entity is registered under the deferred GST scheme. You and your related entity have a common director and are located in the same building. You have internal records to show that you paid your related entity for the GST on the importation.

You have included GST on the supply of services and parts to the overseas entity.

The information available to you indicates that the overseas entity is a company that is not registered with the Australian Securities & Investments Commission (ASIC). They are not a resident of Australia for income tax purposes and are neither registered nor required to be registered for GST. They do not carry on any business in Australia on their own or through an agent.

Reasons for decision

Question 1

Summary

GST is payable on the supply of maintenance and warranty services under your agreement with the overseas entity where the services are provided to their clients in Australia. GST is also payable on the supply of the spare parts.

Detailed reasoning

GST is payable on taxable supplies.

Section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that you make a taxable supply if:

a. you make the supply for consideration

b. the supply is made in the course or furtherance of an enterprise that you carry on

c. the supply is connected with Australia, and

d. you are registered or required to be registered for GST.

However, the supply is not a taxable supply to the extent that it is GST-free or input taxed.

Under the terms of the Contract, you supply maintenance and warranty services to the overseas entity. The supply of these services satisfies the requirements of paragraphs 9-5(a) to 9-5(d) of the GST Act as:

a. you receive consideration from the overseas entity for the supply of the services

b. the supply is made in the course of an enterprise that you carry on

c. the supply is connected with Australia as the services are performed in Australia and made through an enterprise that you carry on in Australia, and

d. you are registered for GST.

The supply of the maintenance and warranty services is not input taxed under the GST Act or under any other Act. Therefore, what is left to determine is whether the supply is GST-free.

The supply of maintenance and warranty services is not considered to be a supply of goods or real property. Hence, the GST status of this supply is appropriately considered under section 38-190 of the GST Act, which provides that certain supplies of things other than goods or real property, for consumption outside Australia, are GST-free. Of relevance, are items 2 and 3 in the table in subsection 38-190(1) of the GST Act.

Item 2 in the table in subsection 38-190(1) of the GST Act (item 2)

Item 2 provides that a supply of a thing, other than goods or real property, made to a non-resident is GST-free if the non-resident is not in Australia when the thing supplied is done and:

a. the supply is neither a supply of work physically performed on goods situated in Australia when the work is done nor a supply directly connected with real property situated in Australia, or

b. the non-resident acquires the thing in carrying on the non-resident's enterprise, but is not registered or required to be registered.

Non-resident not in Australia when services are supplied

Goods and Services Tax Ruling GSTR 2004/7 provides guidance on when a supply is made to a non-resident who is not in Australia for the purposes of item 2.

A non-resident for GST purposes is an entity that is not an Australian resident for the purposes of the Income Tax Assessment Act 1936.

A company is a resident of Australia if:

· the company is incorporated in Australia, or

· the company is not incorporated in Australia but has either its central management and control in Australia or its voting power is controlled by shareholders who are residents of Australia.

On the information provided, the overseas entity is not a resident of Australia for income tax purposes.

As stated in paragraph 37 of Goods and Services Tax Ruling GSTR 2004/7, we consider that a non-resident company is in Australia if that company carries on business (or in the case of a company that does not carry on business, carries on its activities) in Australia:

a. at or through a fixed and definite place of its own for a sufficiently substantial period of time, or

b. through an agent at a fixed and definite place for a sufficiently substantial period of time.

You advised that the overseas entity does not carry on a business in Australia on their own or through an agent and are not registered with ASIC. Therefore, based on the information provided, we consider that the overseas entity is not in Australia in relation to your supply of maintenance and warranty services when such supply is made.

The supply of your maintenance and warranty services must also satisfy the requirements of either paragraph (a) or paragraph (b) of item 2 for the supply to be GST-free.

Paragraph (a) of item 2

Goods an Services Tax Ruling GSTR 2003/7 examines the meaning of the expressions 'directly connected with goods or real property' and 'a supply of work physically performed on goods' as used in subsection 38-190(1) of the GST Act.

Paragraph 21 of GSTR 2003/7 states:

21. Under items 1, 2 and 3 it is only where the connection between the supply and the goods or real property is a direct one that the location of goods or real property is regarded as the place where consumption occurs. The addition of the adverb 'directly' to the phrase 'connected with' implies a more emphatic connection between the supply and goods or real property. The inference is that the supply is so closely aligned with goods or real property that it is appropriate to treat the location of the goods or real property as the place where consumption occurs.

The maintenance and warranty services that you carry out on the IT infrastructure in Australia for the overseas entity is work physically performed on goods situated in Australia. Therefore, the supply of the services to the overseas entity does not meet the requirements of paragraph (a) of Item 2.

Paragraph (b) of item 2

The supply of the maintenance and warranty services may satisfy the requirements of paragraph (b) of Item 2 if the overseas entity acquires your services in carrying on its enterprise and it is not registered or required to be registered for GST.

However, item 2 is limited by subsection 38-190(3) of the GST Act.

Limitations of item 2

Subsection 38-190(3) of the GST Act provides that a supply covered by Item 2 is not GST-free if:

a. it is a supply under an agreement entered into, whether directly or indirectly, with a non-resident, and

b. the supply is provided, or the agreement requires it to be provided, to another entity in Australia.

In this case, the supply of maintenance and warranty services is a supply under an agreement entered into with a non-resident entity. Paragraph 38-190(3)(a) is satisfied.

GSTR 2005/6 which provides the Tax Office view on the operation of subsection

38-190(3) of the GST Act states at paragraphs 59 and 61:

59. The word 'provided' is used in subsection 38-190(3) to contrast with the term 'made' in item 2. In the context of section 38-190, the contrasting words indicate that if a non-resident contracts for a supply to be provided to another entity, the place of consumption should be determined with regard to the entity to which the supply is provided, not the entity to which the supply is made.

61. Thus the expression 'provided to another entity' means, in our view, that in the performance of a service (or in the doing of some thing), the actual flow of that supply is, in whole or part, to an entity that is not the non-resident entity with which the supplier made the agreement for the supply. The contractual flow is to one entity (the non-resident recipient) and the actual flow of the supply is to another entity.

Under your agreement with the overseas entity, you perform the maintenance and warranty services that the overseas entity is obliged to make to the IT infrastructure warranted. The supply of services is therefore provided to the entity using the goods, who is in Australia. The actual flow of the supply is to this entity.

As the supply is made to the overseas entity but provided to an entity in Australia, paragraph 38-190(3)(b) of the GST Act is satisfied.

Accordingly, subsection 38-190(3) of the GST Act applies and the GST-free status of the supply covered by item 2 is negated. Hence, the supply of maintenance and warranty services to the overseas entity but provided to the overseas entity's client in Australia is not GST-free under item 2.

Item 3 in the table in subsection 38-190(1) of the GST Act (item 3)

Item 3 provides that a supply which is neither a supply of work physically performed on goods situated in Australia, nor directly connected with real property situated in Australia when the thing supplied is done, is GST-free if the supply:

a. is made to a recipient who is not in Australia when the thing supplied is done; and

b. the effective use or enjoyment of which takes place outside Australia.

As outlined above, the maintenance and warranty services that you carry out on the IT infrastructure in Australia for the overseas entity is work physically performed on goods situated in Australia.

Furthermore, although paragraph (a) of the item 3 is satisfied because the overseas entity is considered 'not in Australia' in relation to your supply, paragraph (b) of item 3 is not satisfied. This is because you supply maintenance and warranty services under your agreement with the overseas entity but provide the services to an entity in Australia. Hence, the effective use and enjoyment of the maintenance and warranty services does not take place outside Australia.

Accordingly, the supply of maintenance and warranty services made to the overseas entity but provided to the overseas entity's client in Australia is not GST-free under item 3.

The supply of maintenance and warranty services is not GST-free under any other provision of the GST Act or any other Act. Therefore, as all the requirements of section 9-5 of the GST Act are met, you are making a taxable supply when you supply maintenance and warranty services to the overseas entity, but provide the services to the overseas entity's client in Australia.

Under your agreement with the overseas entity you may purchase any parts needed to complete the service call.

It does not matter if the supply of the maintenance and warranty services is a composite supply of services with the supply of parts being ancillary to the taxable services or a mixed supply of goods and the supply of services. The supply of the parts to complete the maintenance and warranty services is a taxable supply.

Question 2

Summary

You are entitled to claim an input tax credit for the GST paid on the importation of the goods into Australia.

Detailed reasoning

Section 15-15 of the GST Act provides that you are entitled to input tax credits for any creditable importation that you make.

Section 15-5 of the GST Act provides that you make a creditable importation if:

a. you import goods solely or partly for a creditable purpose

b. the importation is a taxable importation, and

c. you are registered or required to be registered.

The first requirement for an entity to make a creditable importation is that the entity imports the goods.

Goods and Services Tax Ruling GSTR 2003/15 discusses creditable importations including the meaning of the phrase 'you import goods' in paragraph 15-5(a) of the GST Act, and who is entitled to claim input tax credits for creditable importations.

Paragraph 149 of GSTR 2003/15 provides that for the purposes of section 15-5 of the GST Act, the entity that imports the goods is the entity that:

· causes the goods to be brought to Australia for application to its own purposes after importation, whether by way of supply, use, or otherwise; and

· completes the customs formalities for the entry of the goods (whether directly or through a customs broker or an agent).

Paragraph 50 of GSTR 2003/15 provides that the entity that causes goods to be brought to Australia is identified by looking to the purpose for which the goods are brought here. The entity whose purpose it is to apply the goods by way of supply, use or other application to its purposes after importation is the entity that causes the goods to be brought to Australia.

Generally, there is only one entity which causes goods to be brought to Australia for application to its own purpose after importation. However, paragraph 135 of GSTR 2003/15 provides that where goods are imported in the course of being supplied, there may be cases where both the supplier and the acquirer can be said to have caused the goods to be brought to Australia for their own purpose. For example, the supplier may cause the goods to be brought into Australia for the purpose of supplying them, and the acquirer may cause goods to be brought into Australia to apply them to its own purpose after importation.

In your case, both you and overseas entity have caused the goods to be brought into Australia. The overseas entity has caused the goods to be brought into Australia for the purpose of supplying them to you. You have caused the goods to be brought into Australia to use in your business after importation.

However, the customs formalities were completed by your related entity in conjunction with the customs broker.

For input tax credit entitlement purposes, the entity that causes the goods to be brought to Australia must ensure that it enters the goods for home consumption by appearing as 'owner' on the entry, or appointing an agent to do so on its behalf.

If an agent enters goods for home consumption under an authority granted by the principal, it is the principal, not the agent that makes the taxable importation and is liable to pay the GST on that importation. This is consistent with the general law of agency where the acts of an agent are the acts of a principal, and the principal is bound by the legal effects of the transaction.

It is necessary to establish that the entity making the entry for home consumption does so as agent for the entity that causes the goods to be brought to Australia for application to its purposes. If agency cannot be established, the entity that causes the goods to be brought to Australia for application to its purposes would not be entitled to an input tax credit.

On the information provided, your related entity is acting as your agent when it completes the customs formalities.

Hence as you are the sole entity which satisfies both factors contained in paragraph 149 of GSTR 2003/15, you are the entity that imported the spare parts for the purposes of section 15-5 of the GST Act.

As you have imported the spare parts for use in your business, paragraph 15-5(a) of the GST Act is satisfied.

The remaining requirements for an entity to make a creditable importation are that the importation is a taxable importation and the entity is registered or required to be registered for GST.

Section 13-5 of the GST Act provides that an entity makes a taxable importation if:

· goods are imported and

· the entity enters the goods for home consumption within the meaning of the Customs Act 1901.

However, an importation is not a taxable importation to the extent that it is a non-taxable importation.

On the information provided, the importation of the spare parts is a taxable importation. Hence, paragraph 15-5(b) of the GST Act is satisfied.

Furthermore, paragraph 15-5(c) of the GST Act is satisfied because you are registered for GST.

Therefore, as all the requirements of section 15-5 of the GST Act are satisfied, you are making a creditable importation. Hence, you are entitled to claim an input tax credit for the GST paid on the importation of the goods into Australia.

You should note that where an agent pays the GST liability on behalf of its principal, recovery of the GST paid by the agent is a matter between the agent and the principal and the scope of the agent's right to be indemnified for expenses.